All properties with an active and outstanding mortgage have a ‘Charge’ from the original lender against them at the Land Registry. This is known as the First Charge and any further advances secured against the property will be registered as a subsequent ‘Charge’ by each lender. Any new ‘Charge’ to be made against the property will have to be accepted by the First Charge lender, which is normally granted, i.e. the second lender would place a Second Charge on the property with the consent of the first Mortgage company.
It is when a property is going to be sold that the significance of the ‘Charges’ on it become apparent. The solicitors involved in the sale will settle the first charge mortgage before using the proceeds of the sale for any other charges on the property.
All loans that result on a ‘Charge’ being placed on a property are secured against its available equity. These are also known as Secured Home Loans, Top-Up Loans or Secured Further Advances.
The first charge mortgager will obviously be in the most secure position, as they normally only lend a maximum of 80% of the market value of a property. They rely on their own valuation by using reputable surveyors local to the property.
A homeowner with sufficient equity in their property can apply for a secured second charge loan, which will place a second charge against their home. The amount, interest rate (APR) and term of the loan will be much better than an unsecured loan, but not as competitive as the original mortgage.
These types of loans are normally available for up to 80% of the current value of the property. So, a borrower with a house worth £300k with an outstanding mortgage of £120k could apply for a maximum second charge loan of £120k.
Second Charge Defined
A property with sufficient available equity above the first charge mortgage can have a second mortgage secured on it.
Property Value: £500,000
1st Charge: £200,000
Available Equity: £300,000
Max. 2nd Charge: £200,000
Total Borrowing: £400,000
It is important to note that the maximum second charge loan available to the homeowner in the above scenario is less than the total available equity, as the usual 80% maximum borrowing is calculated using the property value not the available equity.
Homeowners use this type of access to finance for relatively large projects, e.g. a house extension and/or a loft conversion. They are also ideal for people who would like to clear their more expensive unsecured debt by using their property’s available equity to obtain a secured second charge loan at a much lower interest rate (APR) than they are being charged by the unsecured loan and credit card companies, but slightly higher than the first charge mortgage provider’s rate. This is always the case, as the second charge mortgager is effectively taking on a higher risk than the first charge.
Re-Mortgage vs Second Charge Loan
A homeowner could opt for a Re-Mortgage if they’re out of any fixed rate contracts with their current lender to take advantage of better deals in the market.
However, a second charge loan is ideal for customers who are looking to borrow more than £25k and are not able to break their fixed-term contract with their current lender due to a hefty Penalty Charge and other fees.
Both have their place in the mortgage market and can be taken out on a Repayment (capital and interest) or Interest-Only basis.
A second charge loan is ideal for homeowners looking to finance a larger than average home improvement project. But, they are not the best option for all circumstances and borrowers, who may be better off going for a Re-Mortgage to raise the funds, which may keep their regular payments slightly lower, as they could shop around to get a better APR.
Cheryl Dunham’s expertise as a consultant on secured loans and mortgages is valued on a number of financial sites where she has worked behind the scenes as an expert editor. You can read some of her articles on www.secondmortgage.org.uk .